Why Installment Loans are Here to Stay
With regulatory action heading down the pipeline for alternate lenders, companies that provide these loans must make lending changes. One such change is longer repayment terms, which is why installment loans are here to stay. The benefits of installment loans include predictable payment amounts, gaining access to funds quickly and more affordability.
Lengthy Repayment Terms Mean that Installment Loans are Here to Stay
A few years ago, lawmakers established the Consumer Financial Protection Bureau or CFPB. The agency was founded to safeguard the financial interests of everyday citizens. One way it’s doing so is by proposing a set of regulations for alternate and traditional lenders. For instance, the agency is suggesting that lawmakers enact repayment term changes to stop the debt traps that borrowers often step in when they take out short-term loans.
A well-documented problem with short-term loans is that borrowers must pay them back quickly. Lawmakers want lenders to extend the amount of time that they give people to pay back a loan. This is where installment loans come in with their extended repayment terms. With them, borrowers are able to stick to their lending agreements more easily.
What Makes an Installment Loan an Installment Loan?
While auto loans, credit cards, mortgages and payday loans exist, all of these loans fall into one of two categories, which are installments or revolving lines of credit. If a borrower takes out a loan with installment terms, he or she is borrowing a particular amount from a lender. Under an installment loan, the borrower agrees to repay the loan in full with interest by a certain date. To do so, specific monthly payments will be made. A revolving line of credit doesn’t come with a specific payoff date.
Cars, homes and student loans all feature installment terms. Payday loans do not come with stretched out repayment terms. Instead, payday loan lenders require borrowers to repay the withdrawn funds by their next payday.
Until recently, alternate lenders rarely provided loans with installment type terms. The proposals put forth by the CFPB has them changing their business strategy to offer them, practically ensuring that loans with installment repayment terms are here to stay.
The repayment time is usually at least six months, but for larger loans, lenders may give a borrower several years to pay the money back. To qualify for an online installment loan, lenders will assess a borrower’s annual income, credit score and debt-to-income ratio. This lets the lender know how much the person can afford to take out responsibly since they are making sure that the person has enough money to cover the necessities and the added cost of the installment loan.
What are the Benefits of Installment Loans?
According to Investopedia, a major benefit of bad credit installment loans is the predictable payment amount every month. Not only will the amount be the same from month to month, but borrowers will also know exactly when they’ll have the loan paid in full. Predictable payment amounts make budgeting easier. Installment loans often feature smaller payments than other types of loans. For many borrowers, this frees up their monthly cash flow.
Most lenders of bad credit installment loans provide the funds to borrowers quickly. In fact, these funds could become available in as soon as a day or two. This feature is a major lifeline for borrowers who are experiencing a financial emergency. Affordability is another benefit of installment loans. Depending on the person’s credit and borrowing options, interest rates can be lower for online installment loans.
Online installment loans may be able to boost a borrower’s credit score. To determine a borrower’s FICO score, credit bureaus assess a person’s payment history, credit history length, amount owed, kind of credit used and new credit. When installment loans are repaid on time, this is positive credit history.
Providing a Much-Needed Service to Bad Credit Borrowers
From traditional financial institutions to alternate lenders, there are a number of ways to borrow money. Classic lenders require borrowers to have good credit scores for a loan while short-term lenders are willing to loan funds to those who don’t. Bad credit installment loans provide a much-needed service, one that helps people who have few borrowing options.
Who Takes Out Online Installment Loans?
Financial Web reports that young people frequently use installment loans. Those who are just starting to build their credit generally do not have the funds to purchase everything they need. Without credit, many traditional financial institutions won’t lend to them, so they turn to the lenders of installment loans for extra money.
Retired people also borrow money under installment terms. Those who are retired often live on a low, fixed income, one that comes from social security, a pension or an annuity, which gives them a specific amount each month. While this allows most of them to pay for the necessities, it may not be enough for financial emergencies. When money deficiencies arise, online installment loans may be the only option.
Low-income individuals also turn to loans that feature installment repayment terms when they need to borrow unexpected funds. Those who are considered low income have trouble saving enough money for financial emergencies. Along with this, money troubles that wouldn’t phase people who are in higher income brackets have a tendency to blow up the finances of low-income individuals. Bad credit installment loans can prevent this.
Are Installment Loans the Best Option?
Loans with installment terms are often helpful, but they can still land people in a debt trap. Lawmakers should consider implementing other lending options for people who struggle financially. For instance, regulators may need to create funding institutions within low-income communities.
William Michael Cunningham, the founder of Creative Investment Research, said, “One could make the case that the CFPB should take some of that fine money that they’re getting from these financial institutions and establish a fund to create responsible depository institutions serving poor communities.”
Lawmakers could also look at ways to encourage traditional financial institutions to lend to bad credit borrowers. Banks and credit unions often don’t because these borrowers are typically seeking low dollar loans. These types of loans aren’t profitable enough for traditional lenders to offer because of the loan verification process, which requires time to complete. If lawmakers streamline the application procedure, traditional lenders may be willing to jump into this arena of the financial market.
Borrowing Money is Tricky Business, so Read the Terms and Conditions
While it seems straightforward, borrowing money can be a tricky thing. From having the right credit score to setting up affordable payments, borrowers must navigate the financial world by reading the terms and conditions. Online installment loans give bad credit borrowers access to emergency funds. Because the lending option makes it possible for people to stay current on their loans, those who take out funds this way may be able to improve their credit scores and borrow responsibly. To learn more about why bad credit installment loans are here to stay, visit the Personal Money Store.